How to Smell a Rat

From celebrities like Steven Spielberg to charities like the Elie Wiesel Foundation, many people entrusted their money to investment specialist Bernard Madoff. Yet, in 2008 Madoff was revealed as a fraud who had swindled his clients out of a whopping $65 billion.

How can you avoid a similar fate?

There is a common thread across investment fraud: a financial adviser has been given control of the assets.

So whenever you do any type of investing, don’t place your money and assets into just anybody’s hands. Instead, employ a custodian, i.e., a financial institution that safeguards your securities (either physically or electronically), and keeps you informed about your accounts.

Custodians minimize the risk that your money will be stolen or squandered, as they act as a buffer between your money and the financial adviser, and have neither access to your accounts and investment profits, nor do they win a commission when you buy certain stocks.

They ensure that none of your money mysteriously disappears, bar third parties from withdrawing your money without your express consent, and verify every investment and transaction.

With a custodian, you can access your accounts online 24/7, and they also provide their own account statements, which you can cross-check with those your investment adviser provides.

But if your custodian is also the person who makes your investment decisions, you’re in trouble.

Usually, your financial manager can trade on your behalf, but can’t remove your money from your account because he is not your custodian.

But if you give your financial adviser custody of your funds and allow him to invest them directly – if he is unscrupulous – then you’ve unwittingly enabled him to line his own pockets with your money and then cover his tracks with false or misleading account statements.

With no independent custodian’s statement with which to compare your statements, it’s easy for you to be scammed, and hard for you to do that math.